The Government’s economic strategy has been dealt a serious blow after a
leading credit ratings agency downgraded UK debt on its expectation that
growth will "remain sluggish over the next few years".

Moody’s announced on Friday night that it had cut the Government’s bond rating one notch from ‘Aaa’ – the highest possible level – to ‘Aa1’.

The move is a significant setback for Chancellor George Osborne, who has faced criticism that his strategy for dealing with UK’s huge debt burden is failing to deliver.

Moody’s pointed to “continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which [it] now expects will extend into the second half of the decade”.

The credit ratings agency also noted that the Government's debt reduction programme faced significant "challenges" and that the UK's huge debts are unlikely to "reverse before 2016".

Moody’s said that despite considerable structural economic strengths, growth is expected to be sluggish due to a combination of weaker global economic activity and the drag on the UK economy “from the ongoing domestic public- and private-sector deleveraging process.”

“We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbersof jobs."

He also took comfort that Moody’s noted that “the UK’s creditworthiness remains extremely high” thanks in part to a “strong track record of fiscal consolidation”.

Mr Osborne added: “[Moody’s] also make it absolutely clear that they could downgrade the UK’s credit rating further in the event of ‘reduced political commitment to fiscal consolidation’.

“We are not going to run away from our problems, we are going to overcome them.”

In his Autumn Statement in December, Mr Osborne admitted public finances were taking longer to address than he had hoped, adding that he would be forced to extend austerity measures by at least another year.

All three major credit agencies last year put the UK on "negative outlook", meaning they could downgrade its rating if performance deteriorates.